EFG Capital International Corp. and Subsidiary (A wholly-owned subsidiary of EFG Capital Holdings Corp.) Consolidated Statement of Financial

Transcription

1 EFG Capital International Corp. and Subsidiary (A wholly-owned subsidiary of EFG Capital Holdings Corp.) Consolidated Statement of Financial Condition - Unaudited

2 Index Page(s) Consolidated Financial Statement Consolidated Statement of Financial Condition... 1 Notes to Consolidated Financial Statements

3 Consolidated Statement of Financial Condition Assets Cash and cash equivalents $ 29,081,855 Cash segregated under federal and other regulations 15,000 Due from broker 894,350 Due from customers 4,091,107 Term deposits 211,423 Accounts receivable 1,013,171 Due from employees 200,392 Securities owned, at fair value ($349,904 escrow deposit) 349,904 Furniture, equipment and leasehold improvements, net 1,691,862 Intangible assets, net 2,807,779 Goodwill 5,896,809 Other assets 913,930 Total assets $ 47,167,582 Liabilities and Stockholder's Equity Accounts payable $ 3,989,228 Due to broker 4,048,335 Due to customers 882,399 Accrued expenses and other liabilities 9,709,443 Deferred tax liability 287,059 Subordinated loans from related party 8,000,000 Total liabilities 26,916,464 Commitments and contingencies (Notes 9 and 10) Stockholder's equity Common stock ($.01 par value, 1,000 shares authorized, issued and outstanding) 10 Additional paid-in capital 12,812,083 Retained earnings 7,439,025 Total stockholder's equity 20,251,118 Total liabilities and stockholder's equity $ 47,167,582 The accompanying notes are an integral part of these financial statements. 1

4 1. Organization and Nature of Business EFG Capital International Corp. ( EFG or the Company ) is a wholly-owned subsidiary of EFG Capital Holdings Corp. (the Parent ), which is owned by EFG International AG ( EFG International ), which is headquartered in Switzerland and listed in the Swiss Stock Exchange. The Company s principal office is located in Miami, Florida. The Company is a broker-dealer registered with the Securities and Exchange Commission ( SEC ) and is a member of the Financial Industry Regulatory Authority ( FINRA ). The Company provides its customers with investment and brokerage related financial services. The Company buys and sells securities for customers, primarily from Latin America, acting in an agency capacity charging a commission, or in a principal capacity earning mark ups and mark downs on a riskless principal trading basis. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of EFG and its wholly-owned subsidiary, EFG Asesores Financieros Peru SRL (a Peruvian limited liability partnership). All material intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ( US GAAP ) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company has defined cash and cash equivalents as highly liquid instruments with original maturities of less than three months that are not held for sale in the ordinary course of business. The Company s cash equivalents are mainly comprised of money market accounts. Securities Owned, at Fair Value Proprietary securities transactions in regular-way trades are recorded on the trade date, as if they had settled. Profit and loss arising from all securities transactions entered into for the account and risk of the Company are recorded on a trade date basis. Customers' securities transactions are reported on a settlement date basis with related commission income and expenses reported on a trade date basis. Amounts receivable and payable for securities transactions that have not reached their contractual settlement date are recorded net on the consolidated statement of financial condition. Securities are recorded at fair value as described in Note 3. 2

5 Fails to Receive/Deliver Pursuant to Rule 15c3-3, the Company records fails to receive/deliver for transactions where clearance and settlement does not occur pursuant to the agreed upon date that are to be settled by EFG Bank. While the Company does not hold customer funds or securities, and all transactions are conducted on a delivery versus payment basis, the Company records the fails to deliver (included in receivable from customers at ) and fails to receive (due to brokers at June 30, 2014) on its financial statements until the time that the transactions settle. All open transactions as of settled shortly after month-end. Furniture, Equipment and Leasehold Improvements Furniture, equipment, and leasehold improvements are recorded at cost. Additions and improvements are capitalized. Routine maintenance and repairs are expensed when incurred. Depreciation is provided on a straight-line basis using estimated useful lives of three to five years. Leasehold improvements are amortized over the lesser of the economic useful life of the improvement or the term of the lease. Goodwill and Intangible Assets Goodwill represents the purchase price in excess of the fair value of identifiable tangible and intangible assets and liabilities at the date of the acquisition in 2005 of a broker-dealer. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually. Identifiable intangible assets with a finite life are amortized on a straight-line basis over the estimated useful lives of 3 to 15 years. Impairment of Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Goodwill is tested annually for impairment or if events and circumstances indicate that the assets might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit s goodwill over the implied fair value of that goodwill. Management s analysis for the year ended December 31, 2013, revealed no impairment of goodwill or other indefinite life intangibles. An impairment analysis will be conducted for the year ended December 31, 2014 before year end. Stock-based Compensation The Company participates in the Parent s equity incentive plan that awards Restricted Stock Units of EFG International s common stock to certain employees. The Company accounts for the stockbased compensation under the US GAAP provisions, which establishes that compensation expense is recognized for awards granted at the awards fair value as of grant date over the requisite service period of the award, which is generally the awards vesting period. 3

6 Administrative and Other Service Fees Administrative and other service fees include rebates, retrocessions, and trailer fees, as well as intercompany revenue from service level agreements, arranger fees, and revenue sharing agreements. Administrative and other service fees are recorded on an accrual basis. Principal Transactions and Commissions Principal transactions, commissions and related clearing expenses are recorded on a trade-date basis as securities transactions occur. Translation of Foreign Currencies Assets and liabilities denominated in foreign currencies are translated at year-end rates of exchange, whereas the income statement accounts are translated at average rates of exchange for the year. Gains or losses resulting from foreign currency transactions are included in net income. Income Taxes The Company is included in the consolidated federal income tax return filed by EFG Capital Holdings Corp. ( Holdings ). Federal income taxes are calculated as if the companies filed on a separate return basis, and the amount of current tax or benefit calculated is either remitted to or received from Holdings. The amount of current and deferred taxes payable or refundable is recognized as of the date of the financial statements, utilizing currently enacted tax laws and rates. Deferred tax expenses or benefits are recognized in the financial statements for the changes in deferred tax liabilities or assets between years. The Company follows guidance related to accounting for uncertain tax positions. Uncertain tax positions are recognized as tax benefits only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The Company did not have any uncertain tax positions, as defined above, as of June 30, New Accounting Pronouncement The Company reviewed new accounting pronouncements issued by the Financial Accounting Standards Board ( FASB ) for the period ended, noting none that would be pertinent to the business. Additionally, the Company reviewed the Member Alert issued by the Center of Audit Quality and the American Institute of CPAs outlining regulatory changes for Brokers and Dealers. The Company has considered these changes in the preparation of these consolidated financial statements as well as planning for the upcoming year end. 3. Fair Value Measurement Financial instruments are classified based on a three-level valuation hierarchy required by US GAAP. The valuation is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities the Company has the ability to access. 4

7 Level 2 inputs are quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 3 are unobservable inputs for the asset or liability and rely on management s own assumptions about the assumptions that market participants would use in pricing the asset or liability. The unobservable inputs should be developed based on the best information available in the circumstances and may include the Company s own data. Accordingly, the degree of judgment exercised in determining fair value is greater for instruments in this category. The following tables present the Company s fair value hierarchy for those assets measured at fair value on a recurring basis as of. Fair Value Measurements using Assets/Liabilities Level 1 Level 2 Level 3 at fair value Assets Securities Owned U.S. Treasury Bills $ 349,904 $ - $ - $ 349,904 Liabilities Total assets at fair value $ 349,904 $ - $ - $ 349,904 Total liabilities at fair value $ - $ - $ - $ - Level 1 Valuation Techniques The fair value measurements of the U.S. Treasury and equity securities are classified as level 1 of the fair value hierarchy as they are based on quoted market prices in active markets. As of, the Company did not have any financial instruments classified as either Level 2 or Level Cash Segregated Under Federal Regulations The Company periodically segregates cash in a special reserve bank account under the provisions of subparagraph k(2)(i) of Rule 15c3-3 of the SEC to comply with possession or control requirements. At, $15,000 has been restricted and segregated in a 15c3-3 account. 5. Securities Owned At securities owned consists of the following: U.S. Treasury Bills $ 349, ,904 Some of the Company s securities owned are deposited in escrow in connection with clearing and depository agreements with third-parties. See Note 9. $ 5

8 6. Furniture, Equipment and Leasehold Improvements, Net Furniture, equipment and leasehold improvements, net, consist of the following at : Useful Lives (in years) Furniture 5 $ 1,233,817 Equipment 3-5 3,604,625 Leasehold improvements 3-7 2,302,552 Artwork Indefinite 66,128 7,207,122 Less: Accumulated depreciation and amortization (5,515,260) Depreciation expense was $340,741 for the six month period. 7. Intangible Assets $ 1,691,862 Intangible assets consist of the following at : Useful Lives (in years) Customer relationships 15 $ 6,800,000 Broker-dealer license - 50,000 6,850,000 Less: Accumulated amortization (4,042,221) Amortization expense amounted to $226,667 for the six month period and is estimated at $453,333 for each of the next five years. 8. Related Party Transactions $ 2,807,779 The following table sets forth the Company s related party assets and liabilities as of June 30, 2014: Assets Cash and cash equivalents $ 1,255,284 Accounts receivable 227,952 Due from employees 200,392 Other assets 272,103 Total assets 1,955,731 Liabilities Accounts payable 301,311 Accrued expenses and other liabilities 272,849 Subordinated loans 8,000,000 Total liabilities 8,574,160 Net related party liability position $ 6,618,429 6

9 As of, the Company has balances due to EFG Capital Services LLC, EFG Capital Holdings Corp., EFG Bank Cayman Branch, and EFG International for $13,503, $116,069, $43,135, and $128,604, respectively, as a result of intercompany transactions occurring during the period then ended. These balances are included in accounts payable in the accompanying statement of financial condition. The Company originally entered into a subordinated loan agreement ( SLA ) with EFG International on September On September 2013, the SLA maturity was extended to September 30, The SLA has an outstanding balance of $8,000,000 and carries an interest rate of 4.481% per annum. As of, the Company has accrued interest related to the SLA for $272,849. The SLA was made under agreements pursuant to rules and regulations of the Securities and Exchange Commission, approved by FINRA and is subordinated to claims of general creditors. Under the terms of the SLA any repayments prior to its due date are subject to written approval by FINRA. The amount of the subordinated liability is considered part of the Company s regulatory capital. The Company entered into a second subordinated loan agreement ( RSLA ) with EFG International in September 2011 which took the form of a revolving line of credit for $5,000,000. On September 2013, the RSLA credit period was extended to expire on September 30, As of, the RSLA has no outstanding balance. The Company from time-to-time advances funds to its employees at stated maturity dates and interest rates as evidenced by executed promissory notes. At, due from employees amounted to $200,392. Included in the consolidated statement of operations are revenues and expenses resulting from various securities trading and financing activities with certain affiliates, as well as fees for the introduction of customers to the affiliate and certain royalties and services performed by affiliates under the terms of various agreements. The following table sets forth the Company s related party revenues and expenses for the six month period ended : Revenues Administrative and other services fees $ 14,312,762 Commissions and principal trading 1,869,766 Total revenues $ 16,182,528 Expenses Royalty, management and operating support fees $ 1,274,509 Professional fees 2,462,198 Interest expense 180,240 Total expenses $ 3,916,947 Effective January 1, 2012, the Company entered into a revenue sharing agreement with EFG Bank which allows the Company to be compensated at an amount determined in the agreement for the introduction of customers to the affiliate and other fees. The agreement expired on December 31, 2012 and has been renewed in January 2013 for a term ending on December 31, The Company earned revenue of $10,371,390 from EFG Bank pursuant to the agreement during the six 7

10 month period ended and is included in administrative and other services fees in the consolidated statement of operations. Effective January 1, 2013 the Company entered into a revenue sharing agreement with EFG Bank Cayman Branch which allows the Company to be compensated at an amount determined in the agreements for the introduction of customers to the affiliate and other fees. The agreement is for a term of two years, ending on December 31, The Company earned revenue of $12,552 pursuant to the agreement during the six month period ended and is included in administrative and other services fees in the consolidated statements of operations. Effective January 1, 2013 the Company entered into a revenue sharing agreement with EFG Bank & Trust (Bahamas) Ltd which allows the Company to be compensated at an amount determined in the agreements for the introduction of customers to the affiliate and other fees. The agreement is for a term of two years, ending on December The Company earned revenue of $296,840 pursuant to the agreement during the six month period ended and is included in administrative and other services fees in the consolidated statements of operations. Effective January 1, 2010, the Company entered into service level agreements with EFG Capital Holdings and some of its subsidiaries, which allow the Company to be compensated at an amount determined in the agreements for management and operational support. The Company earned revenue of $195,000 pursuant to the agreements during the six month period ended and is included in administrative and other services fees in the consolidated statement of operations. Effective April 1, 2012, the Company entered into a service level agreement with EFG Asset Management (Americas) Corp. ( EFGAM ) which allows the Company to be compensated at an amount determined in the agreements for management and operational support. The Company earned revenue of $391,675 pursuant to the agreement during the six month period ended June 30, 2014 and is included in administrative and other services fees in the consolidated statement of operations. Effective April 1, 2012, the Company entered into a revenue sharing agreement with EFGAM which allows the Company to be compensated at an amount determined in the agreement for the introduction of customers to the affiliate and other fees. The Company earned revenue of $3,038,466 from EFGAM pursuant to the agreement during the six month period ended June 30, 2014 and is included in administrative and other services fees in the consolidated statement of operations. Effective January 1, 2014, the Company entered into a new revenue sharing agreement with EFG Capital Advisors Inc. ( EFGCA ) which allows the Company to be compensated at an amount determined in the agreement for the introduction of customers to the affiliate and other fees. The Company earned revenue of $6,839 from EFGCA pursuant to the agreement during the six month period ended and is included in administrative and other services fees in the consolidated statement of operations. The Company performed broker-dealer services for affiliates of EFG International driven by customer transactions of those affiliates and recognized commission revenue of $1,869,766 during the six month period ended. This amount is included in principal transactions and commissions and brokerage fees in the consolidated statement of operations. 8

11 Effective January 1, 2006, the Company entered into a service level agreement with EFG International which allows the EFG International to be compensated at an amount determined in the agreement for management, operational, IT, and other services. During the six month period ended, the Company paid $1,274,509 in fees associated with these agreements. The amount is included in royalty, management and operating support fees in the consolidated statement of operations. Effective April 1, 2012 the Company entered into a research and marketing agreement with EFGAM which requires EFGAM to provide securities investment research and marketing publications for the use of the company and the company s clients. During the six month period ended, the Company paid $1,414,540 in fees associated with this agreement. The amount is included in professional fees in the consolidated statement of operations. Effective January 1, 2013 the Company entered into a service level agreement with EFG Capital Services LLC ( EFG Services ) which requires EFG Services to provide professional services including, but not limited to, human resources and information technology. The Company incurred expenses of $1,047,658 pursuant to the agreement during the six month period ended June 30, 2014 and is included in professional fees in the consolidated statement of operations. For the six month period ended, the Company incurred interest expense of $180,240 related to the SLA and is included in interest expense in the consolidated statement of operations. 9. Clearing Agreements Clearing and depository operations for the Company s securities transactions are provided by JP Morgan and Pershing, third party clearing organizations, and EFG Bank. Pursuant to the Company s agreement with JP Morgan Clearing Corp. and Pershing, the Company is required to maintain $250,000 and $100,000 in security escrow deposit, respectively. The deposits consist of U.S. Treasury Bills included within securities owned in the consolidated statement of financial condition. As of and through the date these consolidated financial statements were available for issuance, the Company plans to end its relationship with JP Morgan effective September 30, Sub-Clearing Agreements The Company has entered into sub-clearing agreements with foreign broker-dealers. The Company executes transactions for customers of the broker-dealers in exchange for a percentage commission or mark-up and in some cases, a minimum monthly fee. Guarantees The Company applies the provisions of the FASB s guidance, which provides accounting and disclosure requirements for certain guarantees. The Company has agreed to indemnify the clearing organization for losses that it may sustain from the customer accounts introduced by the Company. At, there were no customer balances maintained at its clearing organizations and subject to such indemnification. The Company has experienced no losses or claims historically under the terms of this indemnification and, accordingly, has recorded no liability at. In accordance with the margin agreement between the clearing organizations and customers, customer balances are collateralized by customer securities and supported by 9

12 other types of recourse provisions including the right to request customers to deposit additional collateral or reduce securities positions without the consent of the customer. 10. Commitments and Contingencies Leases The Company rents office premises and telecommunications equipment under non-cancelable operating lease agreements. The Company currently has offices in Miami, Key Biscayne, and Peru. In June 2014, the New York office lease and sub-lease agreements were not renewed and are therefore no longer included as a lease obligation. Sub-lease income of $139,511 has been recognized for the six month period ended and is included in rent expense in the consolidated statement of operations. Lease obligations under the above-mentioned agreements as of are as follows: Year , ,653, ,179, and thereafter - $ 3,660,123 Rent expense in the six-month period ended amounted to $797,061. The commitment schedule above does not include the lease expense to be recognized in 2014 for the Key Biscayne office as it was fully pre-paid in The lease term for this space is set to expire on October 31, 2014 and the expense to be recognized in 2014 is $43,842, of which $26,305 has been recognized during the six month period ended. Concentration of Credit Risk The Company and its subsidiary are engaged in various trading and brokerage activities in which counterparties primarily include broker-dealers, banks, and other financial institutions. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the instrument. It is the Company s policy to review, as necessary, the credit standing of each counterparty. Legal Matters During the six month period ended and through the date these consolidated financial statements were available for issuance, the Company was not involved in any legal proceedings, claims, or litigation that in the opinion of management, will result in a material adverse effect on its financial position. 11. Net Capital Requirements The Company is subject to the SEC Uniform Net Capital Rule 15c3-1 that requires the maintenance of minimum net capital equal to the greater of $250,000 or 6 2/3% of Aggregate Indebtedness, and requires that the ratio of aggregate indebtedness to net capital, both as 10

13 defined, will not exceed 15 to 1. At, the Company had net capital (as defined) of $15,200,547 which was $14,006,693 in excess of that required. The Company s net capital ratio was 1.18 to 1. The accounts of the Company s subsidiary, EFG Asesores Financieros S.R.L, are not included as capital in the computation of the Company's net capital, because the assets of the subsidiary may not be readily available for the protection of the Company's customers, broker-dealers, and other creditors, as permitted by Rule 15c Savings Investment Plan The Company maintains a 401(k) Savings Investment Plan (the Plan ) to provide retirement benefits for eligible employees. Generally, all employees who have completed six months of service are eligible to participate in the Plan. Employees may elect to make salary deferral contributions, as defined, up to $17,500 each year, adjusted annually in accordance with regulations. The Company may make discretionary annual contributions in accordance with the provisions of the Plan. The Plan contribution expense incurred by the Company for the six month period ended was $271, Stock Based Plans Since 2009, the Company has participated in the Parent s Restricted Stock Units (RSU s) equity incentive plan which provides RSU awards to the employees of the Company as part of EFG International s equity incentive plan. Effectively, EFG International would grant RSU s to Parent, who would subsequently grant to the Company s employees. After a three year vesting period, EFG International transfers the shares to Parent which concurrently would transfer to the Company s employees. Effective 2012, the Company and the Parent no longer participated in the EFG International equity incentive plan, but the Company continued to participate in Parent s own equity incentive plan. EFG International has committed to provide the Parent on an ongoing basis the shares required to settle the RSU awards with the Company s employees at the end of each vesting period in exchange for an equity consideration from the Parent for the 2010 grants and nominal cash and equity consideration from the Parent for shares granted in subsequent years. The RSU incentive awards under the above-mentioned plan as of are as follows: Year Fair value Dec. 31, 2013 Forfeitures Current year Current year Jun. 30, 2014 granted at grant date unamortized to date grants amortization unamortized ,354 74,524 (2,777) - (71,747) ,738, ,483 (6,994) - (286,637) 421, ,349,321 1,755,082 (14,892) - (385,521) 1,354, ,408, ,408,086 (116,069) 1,292,017 $ 2,545,089 $ (24,663) $ 1,408,086 $ (859,974) $ 3,068, Financial Instruments with Off-Balance Sheet and Credit Risk In the normal course of business, the Company enters into transactions to buy and sell securities with other broker-dealers in order to fill its customers orders. The Company may be required, in the unlikely event of non-delivery of securities owned by other broker-dealers, to purchase or sell the 11

14 securities in the open market to correct a failed settlement. These corrective transactions to buy and sell may result in losses that are not reflected in the accompanying financial statements. Securities transactions with other brokers and customers can result in concentrations of credit risk. Credit risk is the amount of accounting loss the Company would incur if other broker-dealers or the customer failed to perform their obligations under contractual terms. To mitigate this risk, EFG, together with its affiliates, reviews and monitors the financial condition of the broker-dealers with whom it deals, as well as the size of the transactions it performs with such broker-dealers. As further mitigation of settlement risk, EFG mostly buys or sells securities for its customers when it is certain that either the cash or the securities to settle are available in the customer s custody account. 15. Subsequent Events The Company considered subsequent events through August 27, 2014, the date the financial statements were available to be issued, noting no events warranting disclosure or adjustments to the financial statements. ***************** 12